Estate Planning

Generally, the goals of estate planning are to provide for financial security in life and to maximize - given the client's goals and objectives - the estate for family and other heirs following death. To fully leverage estate preservation opportunities and develop strategies to help achieve distribution objectives, we consider:

  • Will and trust design strategies
  • Property ownership alternatives, including the review of titling and beneficiaries to coordinate with your overall plan
  • Estate tax reduction techniques
  • Personal Risk Management insurance analysis
  • Qualified plan distribution alternatives
  • Family-gifting strategies
  • Charitable planning
  • Employee stock option optimization

Tax Considerations

The estate planning landscape has been marked by change and uncertainty in recent years. Under 2001 tax reform, the Federal estate tax became progressively generous in the run-up to 2010, when it was phased out completely for a single year. Under the 2010 Tax Relief Act, the Federal estate tax was reinstated in 2011. Furthermore, The American Taxpayer Relief Act of 2012 made permanent most of the tax cuts passed between 2001 and 2010 and extended other temporary tax provisions. In 2018, The Tax Cuts and Jobs Act of 2017 increases the individual estate/GST/Gift exemption amount by double to $11,180,000, $22,360,000 for married couples and registered domestic partners.  Although, this exemption level will be cut in half (adjusted for chained CPI indexing) after December 31, 2025.

Parameters of the Estate, Gift and GST Taxes Under Current Law (2018)
  Maximum Tax Rate (Percent) Applicable Exclusion Amount (the Exemption)
  Estate and GST Gift Estate and GST Gift, Lifetime Gift, annual, per recipient*
2014 40 40 $5.34 million $5.34 million $14,000
2015 40 40 $5.43** million $5.43** million $14,000
2016 40 40 $5.45 million $5.45 million $14,000
2017 40 40 $5.49 million $5.49 million $14,000

*The exemption, which was $10,000 in 1998, is indexed for inflation in $1,000 increments.
** The exemption amount is indexed (based on chained Consumer Price Index) for calendar years after 2011 through 2017 and in year 2026 and beyond.

***The exemption amount is based on the Tax Cuts and Jobs Act of 2017 which sunsets December 31, 2025.
****Generation Skipping Transfer Tax
Source: Internal Revenue Code

Portability of Exemption Equivalent

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Act) allows portability of a decedent's unused estate exemption to the decedent's surviving spouse. Portability has been made permanent for 2013 and beyond under the American Taxpayer Relief Act of 2012 (ATRA).

In addition, portability applies to the unused exemption of the surviving spouse's most recent deceased spouse. Thus, beginning after 2010, a surviving spouse could use his/her exemption (assume $11,180,000) plus the unused exemption of his/her most recent deceased spouse, for a possible total of $22,360,000. Utilizing the exemption amount during life generally tends to be better than waiting until death if the estate exceeds the prevailing exemption amount.

Reunification of the Estate and Gift Tax Regimes

The estate and gift tax exemption and tax rates will be the same. Thus, for 2017 the estate and gift tax exemptions will be $5.49 million; and the maximum estate and gift tax rate will be 40%.

Income tax planning has become a primary tax planning goal for wealthy individuals when it comes to estate planning. This is the case for estates that are both below and above the prevailing estate/GST/Gift tax exemption amounts. In some states, the combined federal and state effective income tax rate exceed the estate tax rate of 40%.

Currently, the basis of inherited property is generally "stepped up" to its fair market value as of the decedent's death. Thus, if you inherit property and later sell it, you do not have to pay income tax on any appreciation that occurred before you inherited the property. Some property - tax- deferred money in retirement plans and individual retirement accounts, for example - will not be eligible for the step-up. This property will pass to heirs and beneficiaries with a "carryover" basis equal to the lesser of (1) the decedent's adjusted basis in the property or (2) the property's fair market value on the date of death.

For example, let's say your father dies in 2018 and you inherit closely held stock from him that he bought for $5 a share. The stock is worth $500 a share upon his death. Under the step-up in basis rules, if you sell the stock immediately, there would be no capital gains tax because of the basis step-up for property included in an estate. Lincoln Financial Advisors and its representatives do not offer legal or tax advice. This information should not be construed as legal or tax advice. You may want to consult a legal or tax advisor regarding this information as it relates to your personal circumstances.